Polish Debt & Greek Debt
With the Greek debt crisis in the headlines, and the German government posing as the voice of moral rectitude and responsibility, it might be tempting for the Poles to feel a bit smug themselves. Sure, their debt is higher than the apostles of austerity would like, but it certainly doesn’t compare to the massive levels the Greeks accrued. Nowadays one hears more and more about a shift in the European axis from west-east to north-south (with “backwardness” and “irresponsibility” always positioned geographically inside the troublesome doppelgangers of the “real” Europe). Of course Poles remember the bad old days when Edward Gierek’s wasteful spending and reckless borrowing brought the country to ruin, but fortunately those days are long gone, and Poland now gets to sit at the table with the grownups (eating a very spartan meal, of course—though the Spartans themselves no longer see the virtue in that).
Time for a reality check. Not in order to put Poland in its place, but to offer a corrective to the austerity-mongers (not that they will listen). I admit that I always took it for granted that Gierek’s debt was monstrous. After all, every history textbook tells us so (including my own—gulp!). So it never occurred to me to compare the debt-to-GDP ratio of the 1970s to the present situation. Surprise: the debt of the III Republic has always been higher than the debt of Gierek’s PRL, not just in nominal terms (that’s obvious) but also as a share of the overall economy. Only in the late 1980s did Poland’s debt really spiral out of control, and that was tied up with the profound crisis that ultimately led to the collapse of the PRL itself. So if Gierek was irresponsible, he shares that with every single Polish politician of the post-communist era.
Looking at the chart below, I’m sure one will notice right away that the size of the debt relative to the economy declined radically after the fall of communism. Here is exhibit #1 for the austeritites. Poland brought its debt down, and look what happened: the most dramatic rise in prosperity in the country’s history. Not so fast: let’s remember a moment in March, 1991, when the group of lenders known as the “Club of Paris” agreed to reduce Poland’s debt from 33.5 billion to 16.5 billion, simply writing off the other 17 billion as a loss. Moreover, they restructured the remaining debt so that Poland’s regular payments would be reduced by 80%. When the Greeks proposed a similar package of relief earlier this year, the response by IMF Managing Director Christine Lagarde was “A debt is a debt and it is a contract. Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature.”
It does indeed have consequences. In Poland the 1991 deal allowed the country to pull out of the depths of shock therapy and begin the process of reconstruction that has eventually led to today’s “new Golden Age” (as the Economist recently characterized Poland’s current prosperity). Let’s imagine for a moment what would have happened had today’s fiscal gurus been setting policy a quarter century ago. Does anyone seriously imagine that Poland could have ever emerged from the crisis of the late 1980s had the country been saddled with those massive debt repayments? Does anyone seriously imagine that Poland would be growing today if the country were not (for the time being) still able to exceed the arbitrary debt and deficit limits mandated by the Eurozone?
If I thought for a moment that the faith-based economics of austerity was vulnerable to historical counter-evidence, I would be optimistic that this reminder of Poland’s recent past might do some good. Sadly, it won’t. Back in the early 1990s debt forgiveness for Poland was vitally important to prove that supply-side economics had triumphed over communism. Now a similar concession to Greece would strengthen the arguments of the likes of Syriza or Podemos. In that context, “a debt is a debt.”
Data from http://www.tradingeconomics.com/poland/government-debt-to-gdp and http://kushnirs.org/macroeconomics/gdp/gdp_poland.html.